It might never happen – real estate bubbles rarely burst unless there is accompanying unemployment. The reason is psychological, people hate realizing a loss.

Say you borrow $1 million for a house, and it is now worth $800,000 you just keep paying off the mortgage and hope prices go up again. Selling it would require you pay in some cash to pay off the loan. This is cash you don’t have.

Except your scenario leaves out investors who have multiple IPs and are heavily indebted, hoping on prices always going up. Or boomers planning on selling to fund their retirement. Or owner occupiers on interest only loans of $1m being roller over to interest principle and suddenly have to come up with the extra cash… Extra cash that can’t be put back into the economy and then comes the unemployment for people?

I disagree on both points, Burgon. Leith has previously investigated the unemployment and house price link. In recent overseas busts, unemployment didn’t lead the price declines. See here.

Regarding your “people hate realising a loss” argument:

1. rising mortgage rates and the interest-only reset to P&I means some folk will be forced to sell, they can’t afford to keep paying the loan.

2. there are plenty of households and investors with significant gains/equity, and plenty that don’t have a mortgage. This group won’t recognise a loss from a sale, and may choose to take profits before further price declines.

3. prices are set by the marginal buyer and seller. So prices are going to be influenced by the portion of sellers who want/need to GTFO (see points 1 & 2), not by those that HODL (as per your post).

They wont drop immediately as the property market works like a pond. The stone gets thrown in and the ripples spread out – so when premium areas start to drop in price down to the medium priced areas and medium buyers figure out they can now buy in a better suburb for the same price, then the medium priced areas start to drop. And so on down until the bottom areas are forced into becoming affordable. This is why foreign buyers in premium priced areas affected the housing market so much, they forced local buyers out into other suburbs who pushed those suburb prices up. Just watch the whole process reverse now.

That’s why unemployment is so low. When the price of a house goes up by almost 100% 1 income is simply not enough. Whereas before a single average income was enough to buy a house and put a bit aside, now 2 average incomes is barely enough to stay afloat. They let the investors/foreigners rape the housing market so the prices are insanely overpriced. And now that more people have to work to be able to afford a place, unemployment goes down and the politicians get the credit.

That’s not how the unemployment figures work. Only people looking for work but unable to get it are counted as unemployed.
If one income were enough to service the typical mortgage and lifestyle, more people would decide not to work (eg. to raise kids) but these people would not be counted as unemployed because they are not looking for work.

Economists plot data AFTER the event suggesting that house prices fall first then jobs. However it is a mixed bag as my research back in 1990s found, as I was economics student and working in housing finance industry. Initially small number of jobs went, some couldnt cope and handed in their keys (despite what they want you to believe, if u have no other assets, no one chases you for balance), houses got sold at whatever the bank could get, prices started dropping, as prices started dropping in couple of areas, this affected prices in others which affected credit availability , which then affected jobs. That is why many believe first houses go then jobs. The truth is alot more complex. The poster above gave the analogy of throwing stone in the pond. That is spot on and applies to all inflated asset classes